Techstars Alum AirFox Adds to Boston’s Sponsored Data Cluster

Silicon Valley rules most areas of high tech in the U.S., but Boston can make a case that it’s the epicenter of the emerging “sponsored data” sector, with a handful of startups powering services that give smartphone users free Internet access if they interact with ads or use a sponsor’s app or website.

Three Boston-area companies in this industry—Jana, Aquto, and Datami—have raised venture capital rounds in the past year. Now AirFox of Boston has secured $1.1 million in seed funding a few months after participating in this year’s Techstars Boston program. Other players in this sector include Silicon Valley tech giant Facebook.

What’s interesting about AirFox is the way it’s approaching the market. The startup is targeting the estimated 100 million U.S. smartphone users with pay-as-you-go plans from smaller wireless carriers. AirFox’s service is currently being deployed by Life Wireless, based in Covington, GA, and another client that AirFox co-founder and chief operating officer Sara Choi declines to disclose.

AirFox’s product lets those carriers’ customers opt into a program that serves up ads when they unlock their phones, in exchange for mobile data, Choi says. Carriers get a cut of the money spent by advertisers.

That model is different than rival Jana, for example, whose app lets users in developing countries earn free mobile data by engaging with sponsored content.

“People think it’s just a Third World problem,” Choi (pictured above left) says of lack of mobile Internet access.

But it’s a problem in the U.S., too. AirFox cites a Pew Research Center study from last year that found 23 percent of U.S. smartphone users have canceled or temporarily shut off their cell phone service due to the expense; that number climbs to 44 percent among smartphone owners with an annual household income of less than $30,000.

Many lower-income smartphone users don’t own a computer or have Internet access at home. They use mobile data to accomplish important tasks like looking up bus schedules, reading the news, and communicating with and sending money to family members who live in other countries, Choi says.

“All these things we take for granted, really are powered through the Internet,” she says.

AirFox and other sponsored data companies are seeing traction for several reasons. Advertisers are trying to find new and more targeted ways to reach consumers, especially on mobile devices. Telecom firms are looking for new revenue generators as more smartphone owners shift away from traditional voice and text message contracts and toward services that let them use the Internet to make voice calls and send text messages. And budget-conscious consumers want to save money on mobile Internet access.

But sponsored data tactics have generated controversy among net neutrality advocates, who argue Internet service providers should treat all online traffic the same—meaning Comcast couldn’t charge Netflix a fee to guarantee a better streaming connection, for example. The idea is to ensure a level playing field between companies large and small, and a more diverse Internet for users. Facebook’s Free Basics program, and others like it, was effectively banned in India this year for violating net neutrality principles. Working in partnership with telecom companies, Facebook’s program lets users connect with certain apps and websites without it counting against their data usage, a practice called “zero-rating.” The free sites available in India included Facebook (of course), but also resources like job listings, news outlets, Wikipedia, weather reports, and health information.

Facebook painted it as a humanitarian effort aiming to give people access to basic Internet services. But critics contended that the initiative unfairly steered consumers toward content and online services chosen by Facebook and its partners. The Telecom Regulatory Authority of India agreed, issuing a “prohibition of discriminatory tariffs for data services” in February.

“That probably scared off a bunch of players” in the nascent sponsored data sector, Choi says of the regulatory decision in India.

AirFox is “very much in favor of this concept of open data,” Choi says. She points out that with the startup’s initial product, there are no limits on how consumers use the data credits they earn.

AirFox is planning on launching another product that involves zero-rating, says co-founder and CEO Victor Santos (pictured above right). But through that product, consumers would also earn data rewards that wouldn’t be restricted to visiting certain apps or websites, Choi adds.

“Those players not being net neutral will not survive,” Choi says. That’s partly due to regulatory issues, “but also because I don’t think that the public will stand for it either.”

Meanwhile, sponsored data companies will likely go through the usual shakeout that happens in emerging industries, as firms tweak their products and business strategies, competition heats up, and companies shut down or get acquired.

“I think there’s going to be some consolidation in the marketplace,” Santos says. “There’s going to be people who only focus on a few countries and a few products. I think there’s room for multiple players.”

AirFox currently has eight employees working out of the Harvard Innovation Launch Lab and nine contractors working remotely, Choi says. The plan is to use the seed money to hire a few more people, roll out more products, and sign up more customers.